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Business lessons of the aughts ought not to be ignored

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The past decade has been an interesting one for the scrap industry, to say the least. Demand has blossomed, prices have soared and profit margins for the most part have been good.

Yet just a little more than two years ago, markets were in a state of near-panic after domestic mill productivity plunged to its lowest point in history and export demand nosedived. No one then thought that prices would soon rebound to historically high levels, but yet thats where they are today.

Ferrous scrap prices are the best ever for a first quarter, well ahead of the same period in the boom year of 2008 (though to be fair, April 2008 began the second quarter with a huge increase in what turned out to be a run-up to all-time-high prices; such a dramatic repeat performance seems doubtful this year).

Similar fortunes also are true, to take just a few examples, for used beverage cans, No. 1 brass mill copper and stainless 304 solids and clips, which this year have either reached average annualized all-time highs (aluminum and copper scrap) or come close to them (stainless steel scrap).

The average annual value of all these scrap items taken together so far in 2011 is 327 percent higher than it was 10 years ago. By comparison over the past decade, job growth averaged zero, wages were flat to down slightly, overall energy costs were up about 77 percent and benefit costs (health care, pensions, etc.) were up between 27 and 64 percent, depending on the source and the benefits included. Even the Dow Jones Industrial Average is up only 17.5 percent from 10 years ago.

So on the whole, the years leading up to and including 2011 have seen the value received for scrap outpace most expenses. This has meant that despite the usual peaks and valleysand the monthly fluctuations of each market cyclebusiness has been good overall.

Thats not to say that everything is rosy today. As stories in this issue show, ferrous scrap has the ever-changing export market as well as import and alternative iron competition to contend with; beyond this, consolidations, mergers and mill vertical integration of scrap sources continue to present challenges. On the nonferrous side, the industry faces tougher environmental regulations as well as governmental efforts to rein in theft and fraud.

Add to that the developing concerns over rising fuel costs and the scarcity of rail cars, and business practices often are straining to keep up with the next problem. But those businesses that have, and continue to be steady rather than mercurial, succeed despite these challenges. Practices including a willingness to innovate, to stress efficiency and safety and to invest in new technologies and strategies contribute to the ability of a scrap venture to survive and, yes, thrive.

Scrap usually is a high-volume, low-margin business, which means that moving a lot of material through a yard cheaply and efficiently is critical. When demand is low and scrap is in short supply, that can be a difficult objective to sustain. However, the difficulty should not stand in the way of moves that will improve those aspects of the business.

Those sellers who have made money during the past two years did so by following good business practices and taking advantage of timing when factors were in their favor. Enough months saw strong mill demand, high export demand and rising pricesor a combination of all three in a few, rare exceptionsto drive good margins for those collecting and selling scrap.

When these issues are strong, the scrap business can lead to some extraordinarily profitable periods; when they are weak, times are tough. But when they are mixed, like during the 2008-2010 stretch, they challenge business savvy and managerial instincts.

Of course, such an approach is not a guarantee of better business. Ultimately, scrap dealers have no more objective insight than anyone else involved in the economy on when consumer buying will increase, foreign demand will spike upward or steel productivity will rebound.

Yet one of the most important skills needed in running a thriving scrapyard is being able to manage the business through the cyclical periods of declining revenue. That means anticipating market trends and making investments that make sense for todays environment and tomorrows opportunities.

Scrap businesses should not lose sight of their competition, their role in the local market, their long-term customers, their communities and their goals. Being aware of such thingsalong with getting a handle on those issues that are more or less at the sole discretion of the yard owneris the simple yet essential secret to future success.

Despite all the risks and challenges, many sellers keep up a "the skys the limit" attitude toward growth and profit. And the more successful businesses view the natural volatility of the industry as just another truth to factor into planning. Such an approach, they say, can lead to innovation and greater self-knowledge about business practices.

Such thinking can make the next decade as dramatically successful and profitable as the past 10 years have been, but only if businesses are ready to take advantage of the twists and turns the laws of the market bring to them.

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